Indian stocks hit record highs; set to outperform bonds

MUMBAI, March 17 (Reuters) - India’s broader NSE stock index hit a record high on Friday, as bets on improving earnings and additional economic reforms are fuelling a rally that investors believe will lead equity returns to outpace debt for the first time in two years.

The NSE index, or Nifty, rose as much as 0.7 percent to an all-time high of 9,218.4, marking the third time this week when it hit a record peak, after results over the weekend showed that Prime Minister Narendra Modi’s Bharatiya Janata Party won big in elections in the key state of Uttar Pradesh.

Investors believe the win boosts Modi’s re-election prospects in 2019 and will encourage him to advance his ambitious economic reform agenda.

It also comes as analysts are growing confident of a recovery in earnings because of stronger economic growth: Macquarie estimates earnings-per-share for the NSE could surge 16 percent in the year starting in April, compared with a 5 percent rise in the previous fiscal year and 4 percent in 2014/15.

Though analysts warn near-term corrections are inevitable given that shares have turned more expensive, they believe that improving earnings and economic reforms should easily see equities outperform bonds over the next few years.

“Whether equities will outperform debt over the next three years, that goes without saying, without any doubt,” said Jayesh Shroff, co-founder of investment advisory Cask Capital.

A move to equities from bonds would mark a contrast over 2015 and 2016, when debt markets rallied after aggressive central bank rate cuts, far outperforming shares.

But the outlook for debt has soured after the Reserve Bank of India unexpectedly changed its policy stance to “neutral” from “accommodative” on Feb. 8, sending the benchmark 10-year bond yield up as much as 51 basis points to 6.942 percent. It has since eased to 6.85 percent.

By contrast, the Nifty has gained about 12 percent this year, making it the second-best performing index in Asia.

That has pushed up price-to-earnings in the NSE to 19.85 over the next 12 months, compared with the five-year historic average of 17.8, but fund managers still believe equities will prove a better bet over the medium term.

This optimism has also been underpinned by strong retail investments. Domestic institutional investments, which best captures retail purchases, hit a record high of 1.17 trillion rupees ($17.90 billion) last year and 1.86 billion rupees so far this year.